FISCAL FISCALPOLICY POLICY

Merit goods

Public goods

(would be underproduced by the private sector)

(would not be provided by the private sector) Street lighting, flood defences

Education and health

Government expenditure Redistribution of income and wealth Minimum wages, unemployment benefit

Regulation of economic activity Corruption, military, media control, health and safety

FISCAL FISCALPOLICY POLICY

Tax burden Tax drift

Direct taxes

Proportion of national income taken in taxes

Income tax, national insurance capital gains tax, council tax corporation tax

Taxation Progressive Direct taxes – because the proportion of tax increases as income rises

Indirect taxes VAT, excise duties on fuel, alcohol tobacco, car tax; TV licence

Regressive Indirect taxes – because the proportion of tax decreases as income rises

FISCAL FISCALPOLICY POLICY Taxation affects the demand side and the supply side of the economy

Demand Rise in income tax – reduce disposable income reduce consumer spending Rise in corporation tax – reduce post-tax profits reduce share dividends, reduce investment Rise in VAT or Excise duty – increase the price of goods, reduce consumer spending (NB elasticity)

Supply Rise in income tax – reduce post-tax income, increase hours worked, increase national output, reduce incentive to work A rise in corporation tax – reduce investment, reduce productive capacity, increase tax drift Rise in VAT or Excise duty – increase in prices, increase firms' costs, reduce productivity (NB exports excluded from VAT and Excise duty). NB Tax drift.

FISCAL FISCALPOLICY POLICY

Indirect taxation

FOR

AGAINST

Changes in indirect taxes change the pattern of demand for particular goods and services (France – restaurants).

Indirect taxes increase the price of goods and services. This will increase firms' costs and cause cost-push inflation.

Indirect taxes will not distort the choice between work and leisure (higher direct taxes may encourage workers to reduce their hours of work)

Revenue streams are highly volatile. In a boom when expenditure is high, revenue grows rapidly; conversely in a recession when expenditure falls sharply, so will the revenue (NB same or worse for direct taxes?)

Indirect taxes are difficult to avoid. Some workers can evade paying direct taxes by trading in cash and not declaring their income)

Many indirect taxes have regressive effects and will therefore widen the gap between rich and poor

FISCAL FISCALPOLICY POLICY

Calculate Taxes In (Growth)

Borrowing NB IR and Stability Pact

Government

Calculate Transfers

(unemployment / health)

Fixed expenditure

NB Tax time lags Takes time to recognise demand is too high or too low Takes time to vote and implement appropriate policy Takes time for the policy to work (depending on tax)

FISCAL FISCALPOLICY POLICY

Who should pay? 1. National defence 2. Unemployment 3. Health system 4. Education 5. National energy system 6. Train network

1. Provide a train system for ESSCAland – how, where and why? 2. Provide an energy system for ESSCAland – how where and why? 3. Provide a motorway system for ESSCAland – how where and why?